The Bonus Depreciation Rollercoaster: A Brief History
For real estate investors, bonus depreciation under IRC Section 168(k) has been one of the most powerful tax tools available. When the Tax Cuts and Jobs Act (TCJA) passed in December 2017, it expanded bonus depreciation to 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023. That single provision transformed cost segregation studies from a smart planning move into an essential strategy for any serious investor.
Then the phasedown began. Under the original TCJA schedule, bonus depreciation dropped to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, with full elimination scheduled for 2027. Every year that passed meant less first-year write-off for investors acquiring or improving properties. The urgency was palpable: investors rushed to close deals before each annual step-down, and many delayed cost segregation studies entirely, hoping Congress would act.
What the One Big Beautiful Bill Act Changed
Congress did act. The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, restored 100% bonus depreciation under IRC Section 168(k) and made it permanent. This is not a temporary extension or a short-term patch. The law eliminates the phasedown schedule entirely, locking in full first-year expensing for all qualifying property with no sunset date.
For real estate investors, this is the single most significant depreciation change since the TCJA itself. It removes the uncertainty that plagued acquisition decisions for three years and creates a stable, predictable planning environment going forward.
Key Provisions for Real Estate
The OBBBA bonus depreciation restoration applies to all property that qualifies under IRC Section 168(k), including property identified through cost segregation studies. Specifically, the following MACRS property classes are eligible for 100% first-year bonus depreciation:
5-Year Property: Appliances, carpeting, certain flooring, window treatments, and specific land improvements. These components are commonly reclassified from the 27.5-year or 39-year recovery period during a cost segregation study.
7-Year Property: Office furniture, specialty fixtures, security systems, and certain mechanical components that serve a specific function rather than a structural role.
15-Year Property: Land improvements including parking lots, sidewalks, landscaping, fencing, drainage systems, and exterior lighting. For many commercial and rental properties, 15-year property represents a substantial portion of the reclassifiable basis.
Impact on Short-Term Rental and Long-Term Rental Investors
The distinction between short-term rentals (STRs) and long-term rentals (LTRs) matters significantly for bonus depreciation planning, though both benefit from the OBBBA restoration.
Short-Term Rental Investors: Properties with an average rental period of 7 days or less fall under IRC Section 469 with a critical exception. STR owners who materially participate in the rental activity can use cost segregation losses to offset active income, including W-2 wages, business income, and capital gains. With 100% bonus depreciation restored permanently, an STR investor purchasing a $500,000 property can potentially generate $175,000 or more in first-year depreciation deductions through a cost segregation study (assuming approximately 35% of the purchase price qualifies for reclassification). At a combined federal and state marginal rate of 37%, that translates to roughly $64,750 in tax savings in year one alone.
Long-Term Rental Investors: LTR properties use the 27.5-year residential recovery period under IRC Section 168(e)(2)(A). While passive activity loss rules under IRC Section 469 generally limit how LTR losses can be applied, investors with Real Estate Professional Status (REPS) under IRC Section 469(c)(7) can treat rental losses as non-passive. For REPS-qualified investors, the combination of cost segregation and 100% bonus depreciation creates massive first-year deductions that offset all forms of income.
Retroactive Application: Recovering Missed Deductions
One of the most overlooked aspects of the OBBBA restoration is its retroactive reach. Investors who placed property in service during the phasedown years (2023 through 2025) and only claimed the reduced bonus depreciation percentages can now recover the difference.
The IRS allows taxpayers to file amended returns (Form 1040-X) or, in certain cases, file a change in accounting method (Form 3115) to claim the additional depreciation. For an investor who purchased a $750,000 rental property in 2024 and only claimed 60% bonus depreciation on reclassified components, the gap between 60% and 100% could represent $50,000 to $70,000 in additional deductions. That is real money left on prior returns.
Investors should work with a qualified tax advisor to determine whether an amended return or a Section 481(a) adjustment via Form 3115 is the more efficient path. Both approaches have specific filing requirements and timing considerations.
Planning Opportunities With Permanent 100% Bonus Depreciation
The permanence of 100% bonus depreciation under the OBBBA changes the planning calculus in several important ways:
No More Timing Pressure
Investors no longer need to rush acquisitions to beat a phasedown deadline. Property can be acquired and placed in service on any timeline without sacrificing bonus depreciation benefits. This allows for better deal selection and more thorough due diligence.
Renovation and Improvement Planning
Capital improvements to existing rental properties also qualify for bonus depreciation when a cost segregation study identifies reclassifiable components. With 100% locked in permanently, investors can plan renovations across multiple years without worrying about diminishing depreciation benefits.
Portfolio-Level Tax Management
Permanent bonus depreciation enables long-term portfolio strategies. Investors can model acquisition schedules, anticipated cost segregation results, and depreciation recapture scenarios with confidence that the rules will not change mid-plan.
Dollar Example: The Real Tax Impact
Consider a real estate investor who purchases a single-family rental property for $600,000 (excluding land value of $100,000, leaving a depreciable basis of $500,000). A cost segregation study reclassifies 35% of the depreciable basis into shorter-lived asset classes:
Reclassified to 5-year property: $100,000
Reclassified to 7-year property: $25,000
Reclassified to 15-year property: $50,000
Total reclassified: $175,000
With 100% bonus depreciation, the entire $175,000 is deducted in year one. The remaining $325,000 stays on the standard 27.5-year schedule, producing an additional $11,818 in annual depreciation. Total first-year depreciation: $186,818.
Without cost segregation, the investor would claim only $18,182 in straight-line depreciation ($500,000 divided by 27.5 years). The cost segregation study with bonus depreciation produces over ten times the first-year deduction.
For an investor in the 37% federal bracket, the difference in first-year federal tax savings alone is approximately $62,375. Add state taxes, and the benefit grows further.
Why Cost Segregation Studies Are More Valuable Than Ever
With 100% bonus depreciation now permanent, every dollar reclassified through a cost segregation study is a dollar deducted immediately. There is no phasedown discount, no uncertainty about future rates, and no need to time the study around legislative deadlines.
Cost segregation studies should be considered for any rental property acquisition above $200,000 in value. The study fees typically range from $3,000 to $7,500 depending on property complexity, and the resulting tax savings routinely exceed the cost by a factor of 10 to 20. For investors acquiring multiple properties or completing substantial renovations, the ROI is even more compelling.
The OBBBA has given real estate investors exactly what they needed: certainty. The question is no longer whether bonus depreciation will be available. The question is whether you are taking full advantage of it.
Take Action on Your Real Estate Tax Strategy
If you own rental property, are acquiring new investments, or placed property in service during the phasedown years and want to recover missed deductions, now is the time to act. AE Tax Advisors specializes in cost segregation studies and advanced tax planning for real estate investors. Our team can quantify your bonus depreciation opportunity, identify retroactive savings, and build a forward-looking strategy around permanent 100% expensing. Call us at (631) 614-5762 or email team@aetaxadvisors.com to schedule a consultation.